Abstract

This article incorporates well-documented managerial traits into a tradeoff model of capi-tal structure to study their impact on corporate financial policy and firm value. Optimistic and/or overconfident managers choose higher debt levels and issue new debt more often but need not follow a pecking order. The model also surprisingly uncovers that these manage-rial traits can play a positive role. Biased managers ’ higher debt levels restrain them from diverting funds, which increases firm value by reducing this manager-shareholder conflict. Although higher debt levels delay investment, mildly biased managers ’ investment deci-sions can increase firm value by reducing this bondholder-shareholder conflict. I.